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Wednesday, January 30, 2013

GIS Clawback

Conventional wisdom is that the Guaranteed Income Supplement (GIS) is clawed back 50 cents for each additional dollar of income. However, with the GIS top-up introduced in 2011, the total clawback rose to 75% within a range of income. This makes it even more important to take into account the GIS clawback when helping low-income seniors plan their finances.

Service Canada provides a set of tables to help seniors determine their GIS and Allowance payment amounts. These tables apply only to seniors who are receiving the maximum Old Age Security (OAS) amount. Starting with your yearly income excluding OAS, GIS, and Allowance, you can look up your monthly GIS or Allowance. However, the tables won’t give you a simple picture of how GIS works.

The Service Canada tables make it easy for seniors to look up the GIS payments, but they’re cumbersome for planning out different scenarios. Rather than focusing on yearly income, I prefer to think about monthly income. And for couples, instead of looking at their individual GIS payments, I prefer to look at their combined payments.

Let’s focus on Table 2, which gives GIS payments (including top-up) for married or common-law partners both receiving maximum OAS payments. Here is a simple rule that gives the couple’s combined monthly GIS payments to within $2 given their combined monthly income:

Combined Monthly Income
(excluding OAS, GIS, Allowance)

Combined GIS

$0 to $336

$983 minus 50% of Income

$336 to $624

$1067 minus 75% of Income

$624 to $1822

$911 minus 50% of Income

Expressed this way, it’s much easier to see the 50% and 75% clawback rates. (This rule only applies to the current quarter (until the end of March 2013) because GIS payments rise with inflation each quarter.)

People with low incomes are often better off saving in TFSAs rather than RRSPs. The reason for this is because income from RRSP or RRIF withdrawals triggers GIS clawbacks. In some cases it even makes sense to collapse an RRSP and move the net withdrawal (after income taxes) to a TFSA. This results in extra income taxes but increases future GIS payments. The table above can be helpful in determining whether such a strategy makes sense.

4 comments:

Not a GIS question but this is related to your last comment about transferring RRSPs to a TFSA:

Say you have 1000 shares of TD stock in your RRSP and want to move it to your TFSA over a period of a few years. Can you do an in-kind transfer of 200 shares, provided you have the contribution room in your TFSA and you have the cash to pay the income tax that's triggered?

@Robb: I don't know if any financial institutions offer a way to do this in one step, but it can be done in 2 steps. Do the in-kind withdrawal from the RRSP to a taxable account, pay the withholding taxes, and then make an in-kind deposit into your TFSA. I've never done an in-kind withdrawal from an RRSP -- you'll have to talk to your financial institution to see how you can arrange to pay the withholding taxes without selling some of the shares from the RRSP.

I have a question about GIS I do not see any answer to anywhere. I am aware of OAS clawback and the GIS clawback of 50 cents on the dollar based on last years income. BUT if for example you qualified for a certain GIS in 2014 based on 2013 income but your 2014 income is much greater and pushes you over the threshold (for 2015) does the CRA go back and in in effect recover from you the 2014 GIS income because your income was more than expected.?